One of Warren Buffet's most famous quotes is, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
It seems simple enough, but finding high-quality companies at reasonable prices can be a difficult task – especially in bull markets. It is often the case that the companies many investors want to own, trade at a premium that just cannot be justified.
I have identified three wonderful stocks that I would love to own but I don't think are currently trading at a fair price:
1. Blackmores Limited (ASX: BKL) – Blackmores is Australia's largest vitamin and supplement company with a market capitalisation reaching $1.5 billion. The company has established itself as the most trusted brand in the sector and distributes its products directly to pharmacies, supermarkets and health food stores throughout Australia.
The company is also expanding its operations into Asia, and this is seen as the driving force moving forward. Sales in the Asia region have increased by 43% in the last year and the market has taken the share price higher on the back of this.
Although Blackmores has an impressive growth history and positive outlook, the shares are trading on a price-to-earnings (P/E) ratio of around 35. For me, it is just too much of a premium and I would be looking for the share price to fall below $50 before making a move.
2. Bellamy's Australia Ltd (ASX: BAL) – Bellamy's offers a range of organic food and formula products for babies and toddlers and has been a star performer since listing in October 2014. The share price has risen by over 260% and the company is now reaching a market capitalisation of $500 million.
Sales of its products in Australia have surged with many customers shipping the products to friends and relatives into parts of Asia. The company is also moving to directly expand its operations internationally to take advantage of the growing demand for baby formula especially within China.
In June, Bellamy's provided profit guidance to the market that showed it was likely to record earnings of around $8 million for FY15. At the current share price, the shares are trading at a P/E ratio of 60. I would be resistant to buy at these prices as any negative news could see the share price plummet. In my opinion, a fair multiple for Bellamy's would be around 30x and this would mean a share price under $2.50.
3. Technology One Limited (ASX: TNE) – Technology One has proven itself to be one of the most successful Australian software companies over the last 15 years with the company doubling in size every four years during that time. Some of its achievements are impressive including 13% per year compound growth in profits after tax and 22% per year compound growth in dividends.
The company operates in 12 countries and offers a variety of products to customers ranging from private businesses to governments. Technology One now has a market capitalisation of nearly $1.2 billion and is trading on a P/E ratio of close to 35. Profit growth of 10% to 15% is expected for the full year and investors can expect to receive a dividend yield of around 1.7%.
In my opinion, although the company has the potential for continued growth, I feel the stock is over-priced at the current levels and all of the upside may already be priced in. If the shares fall to $2.80, I would see this as a good buying opportunity.
Although these stocks might not be trading at a fair price right now, The Motley Fool has hand-picked two stocks that Warren Buffet could certainly love!
